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Buy-to-Let or Holiday Let – Which Constitutes The Better Investment?

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If you have money to invest and are unsure about the financial markets and wider economic uncertainties we currently face, bricks and mortar are always a tempting proposition. Buying a second home is now subject to a stamp duty surcharge of 3% on the purchase price – but don’t let that put you off. House prices are continuing to show healthy growth and the demand for rental properties has never been higher. Add to that the renewed interest in UK holidays, and you have a real choice.

So, should you capitalise on the staycation boom and acquire a holiday let? Perhaps you like the idea of owning a period cottage in a picturesque location that you can also enjoy yourself? Or should you invest in a traditional buy-to-let (BTL) that you can rent on a longer-term basis? Let’s look at both in turn and the pros and cons of investing in each.

Which will provide a higher ROI?

Your return on investment (ROI) on any property depends on a variety of factors including:

  • the initial purchase price
  • the location of the property
  • its architectural features
  • a property’s overall condition, and
  • current market demand.

For would-be landlords, the importance of doing your research cannot be overstated. Look at the local market and speak with a local letting agent or holiday let company to get a clear idea of the potential rental income before you commit to buying the property.

The good news is that the appetite for UK domestic holidays is stronger than ever, a trend that’s set to continue. This positions an investment in a UK holiday home as a potentially lucrative income stream. Depending on the exact location, occupancy levels of 40 weeks per year are not unheard of for the most popular destinations, though the average is nearer half that. In peak season, a holiday cottage can fetch as much in a week as a normal BTL would generate in monthly rent. In short, if your holiday property is successful in terms of bookings, the return can be much higher than for a longer-let property.

On the downside, a good holiday property in a desirable location will be more expensive to buy than a comparable BTL. Then there is always the risk of off-peak void periods when rental yields can be desperately low – something that can be entirely out of your control. Running costs on furnished holiday homes are much higher since you need to keep the place spic and span at all times to remain competitive, plus you’ll be paying for utility bills throughout the year (which are still rising unfortunately). Unless you live locally and can inspect and maintain the property yourself and deal with bookings, you will also need an agent. Letting agents charge around 20+30% commission to manage holiday lets, roughly double that of buy-to-lets.

If you are looking for a stable return all year, a traditional buy-to-let property may be better. With longer-term tenancies, such as 12-24 or even 36 months, which can be provided by Assured Shorthold Tenancies (AST), you’ll have a consistent monthly rental income that you can rely on and predictable outgoings. Unlike holiday cottages, you can choose whether or not to furnish your BTL, utility bills, etc. are typically the tenant’s responsibility. Rents are rising fast, largely as a result of strong competition and not enough rental properties. This is good news for landlords, though less so for tenants who may never be in a position to buy their own home.

That said, there can be challenges with long-term tenancies. To avoid the threat of nightmare tenants who don’t pay rent and/or cause a nuisance or damage the property, it is best to employ a quality agent to manage the tenancy. Ask them what their performances are like and ask to see their stats for late rent payments, properties with rent owed and % of tenancies which end in court involvement to secure an eviction. It would also be good to know what amounts of unpaid rents have been written off by clients of the agency.

If run badly, be prepared for void periods in between tenancy contracts that can constitute a costly gap in income, and make sure you have funds available to invest in property upgrades to meet minimum standards for health & safety, fire safety, gas & electrical safety and energy efficiency.

Which has the most tax advantages?

Holiday properties appear to have escaped many of the additional taxes recently levied at regular BTL properties. Assuming the property qualifies as a furnished holiday let (FHL), it is classed as a business rather than an investment, meaning full mortgage interest tax relief is available and all of it can be offset against profits. Additional deductions against rental income can be made for equipment and furnishing costs, utilities & council tax, cleaning & maintenance, management & marketing.

The above tax benefits are only available if HMRC classifies the property as an FHL. This means it must be available to let for at least 210 days a year and let for at least half of those. No letting period can be longer than 31 days.

Standard buy-to-let landlords have seen their profits dented by stringent new tax rules that were phased in 5 years ago. This includes increases in capital gains tax and a phasing out of mortgage interest tax relief. What’s more, you can also no longer write off 10% of the rental income for wear and tear on the property. Many investors choose to transfer their rental property into a limited company so they can continue to benefit from tax breaks, capital gains tax, stamp duty and inheritance tax liability.

Which requires more hands-on work?

Running a holiday home business can be a full-time job. Indeed, many owners are retirees looking for a new venture to pour their energy into. From marketing the property to managing the bookings, handling check-ins/outs and changeovers, and keeping on top of maintenance and repairs, a lot of effort goes into a successful holiday let. This can be a rewarding activity for some, especially if you live close by. For remote holiday landlords, the potential ‘hassle factor’ should be seriously considered before you make a commitment to invest.

For standard buy-to-let properties, there’s generally less to do once the tenancy agreement is signed. If you’re new to buy-to-letting, most of your time and energy will be required to get the property into rentable condition, comply with all regulations, then find a quality tenant. Chances are that they will be responsible individuals that are reasonable to deal with, not the kind of nightmare tenants mentioned above. The contracts will clearly state both the tenant’s and landlord’s rights and responsibilities, and you are holding their deposit from which any damages can be deducted at the end of the tenancy.

So, which is the best choice for you?

As the above has clearly demonstrated, there are pros and cons to both types of property investment. Becoming a holiday-let landlord does require more involvement, which can be a good or bad thing depending on your lifestyle preferences. If you don’t have a lot of time to spare or don’t relish the thought of frequent visits to look after the place, perhaps a holiday home is not the right choice for you.

While a regular buy-to-let investment property may lack in holiday excitement and the substantial yields achievable in peak holiday season, it is a more down-to-earth financial option that could provide a more dependable income stream.

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